Question

You are a financial analyst for loch motor company and have been asked to determine the impact of alternative depreciation methods. For your analysis, you have been asked to compare methods based on a machine that cost 166,000. The estimated useful life is 8 years and the estimated residual value is29,040. The machine has an estimated useful life in productive output of 214,000 units. Actual output was 27,000 in year 1 and 23,000 in year 2. Required: 1. For years 1 and 2 only, prepare separate depreciation schedules assuming:

a) Straight-line method.
b) Units-of-production method.
c) Double-declining-balance method.

Answer 1

The best production method would be the one with the lowest total cost. In this case, Method 1 would be the best production method.

Step-by-step explanation:

The total cost of each method can be calculated by multiplying the cost of labor per unit by the number of units of labor, and adding it to the cost of capital per unit multiplied by the number of units of capital. For Method 1, the total cost would be $6,000 ($100/unit of labor x 50 units of labor + $400/unit of capital x 10 units of capital). For Method 2, the total cost would be $8,000 ($100/unit of labor x 20 units of labor + $400/unit of capital x 40 units of capital). For Method 3, the total cost would be $7,000 ($100/unit of labor x 10 units of labor + $400/unit of capital x 70 units of capital).

The best production method would be the one with the lowest total cost. In this case, Method 1 would be the best production method since it has the lowest total cost. If the cost of labor rises to $200/unit, the company should still use Method 1 because it would still have the lowest total cost compared to the other methods.